Periodic Reporting for period 3 - 3D-In-Macro (Inequality in 3D – measurement and implications for macroeconomic theory)
Reporting period: 2023-05-01 to 2024-10-31
This project will contribute to improving our understanding of economic inequality and its macroeconomic implications. We seek to do so by combining developments in macroeconomic modeling with insights from rich administrative data on households’ income and savings.
In macroeconomics, much theoretical progress has been made in understanding when distributions matter for aggregates. Newer heterogeneous agent models deliver strikingly different implications for monetary and fiscal policies than what the traditional representative agent models do and allow us to study the distributional implications of different policies across households.
In principle, this class of models can incorporate the potentially rich interactions between inequality and the macroeconomy: on the one hand, inequality shapes macroeconomic aggregates; on the other hand, macroeconomic shocks and policies affect inequality. However, absent precise micro-level facts, it is difficult to establish which of the potential mechanisms highlighted by these models are the most important in reality.
We will contribute toward a better understanding of inequality and its implications by carefully measuring economic inequality and its dynamics. Our exercise will be performed in a unique setting, the Norwegian economy, utilizing novel sources of micro data. The empirical efforts will be disciplined by these recent developments in modeling macroeconomic phenomena with microeconomic heterogeneity.
Our overarching motivation is to quantify the type of micro heterogeneity that matters for macroeconomic theory and thereby inform the development of current and future macroeconomic models. The novel insights we aim to provide could lead to substantial improvements in both fiscal and monetary policy tools. Furthermore, a better understanding of the forces behind growing inequality will inform current debates on this issue and provide important lessons to current and future policymakers.
The project will focus the research efforts along three main avenues. Firstly, we will map out the dynamics and persistence of inequality over time utilizing long panel data series. Secondly, we will focus on intergenerational aspects of inequality (the family or dynastic perspective). In the last part, we will assess the aggregate implications of inequality and heterogeneity. We will use empirical and theoretical insights from recent research to discipline state-of-the-art models and analyze policy.
In macroeconomics, much theoretical progress has been made in understanding when distributions matter for aggregates. Newer heterogeneous agent models deliver strikingly different implications for monetary and fiscal policies than what the traditional representative agent models do and allow us to study the distributional implications of different policies across households.
In principle, this class of models can incorporate the potentially rich interactions between inequality and the macroeconomy: on the one hand, inequality shapes macroeconomic aggregates; on the other hand, macroeconomic shocks and policies affect inequality. However, absent precise micro-level facts, it is difficult to establish which of the potential mechanisms highlighted by these models are the most important in reality.
We will contribute toward a better understanding of inequality and its implications by carefully measuring economic inequality and its dynamics. Our exercise will be performed in a unique setting, the Norwegian economy, utilizing novel sources of micro data. The empirical efforts will be disciplined by these recent developments in modeling macroeconomic phenomena with microeconomic heterogeneity.
Our overarching motivation is to quantify the type of micro heterogeneity that matters for macroeconomic theory and thereby inform the development of current and future macroeconomic models. The novel insights we aim to provide could lead to substantial improvements in both fiscal and monetary policy tools. Furthermore, a better understanding of the forces behind growing inequality will inform current debates on this issue and provide important lessons to current and future policymakers.
The project will focus the research efforts along three main avenues. Firstly, we will map out the dynamics and persistence of inequality over time utilizing long panel data series. Secondly, we will focus on intergenerational aspects of inequality (the family or dynastic perspective). In the last part, we will assess the aggregate implications of inequality and heterogeneity. We will use empirical and theoretical insights from recent research to discipline state-of-the-art models and analyze policy.
The project focuses on three themes and a dedicated part related to measuring the empirical objectives used in the analyses. We have worked on all the main aspects of the research plan so far.
A substantial effort has been made to collect and construct the registry-based panel data of households. This work on collecting data will continue, but the efforts will shift towards developing and finalizing the initiated investigations under the other parts of the research agenda as the project enters its second half.
In the first part of the project, “Dynamics of Inequality,” work has been undertaken to decompose the life cycle dynamics of the wealthiest, including a dissection of the importance of different factors behind wealth, such as returns to wealth and saving rates, and their interactions. A working paper is planned to be released in the coming months, with submission for publication in a peer-reviewed journal. At a more preliminary stage, we are also examining the evolution of wealth inequality in relation to demographic change.
In the second part of the project, “Dynastic Risk Management,” we have in a first paper analyzed how family members of different generations insure each other against adverse economic shocks. The results have so far been presented at conferences and in some workshops. We expect to release a working paper in 2023. In a second paper, we have undertaken analyses to study the importance of bequest motives for saving among the elderly.
In the third part of the project, “Aggregate implications of household heterogeneity,” we have worked to understand the distributional consequences of asset price changes that are associated with lower required returns. In one paper, we show that it can explain observed saving behavior. In another piece, we derive implications for welfare. We have also studied monetary policy transmission, focusing on household heterogeneity, debt, and demographic change. This has resulted in one publication by team member Martin Holm, while at least two more working papers are underway. Postdoc Karl Harmenberg has contributed to two theoretical articles accepted for publication, one on rigid wage contracts in macroeconomic models.
A substantial effort has been made to collect and construct the registry-based panel data of households. This work on collecting data will continue, but the efforts will shift towards developing and finalizing the initiated investigations under the other parts of the research agenda as the project enters its second half.
In the first part of the project, “Dynamics of Inequality,” work has been undertaken to decompose the life cycle dynamics of the wealthiest, including a dissection of the importance of different factors behind wealth, such as returns to wealth and saving rates, and their interactions. A working paper is planned to be released in the coming months, with submission for publication in a peer-reviewed journal. At a more preliminary stage, we are also examining the evolution of wealth inequality in relation to demographic change.
In the second part of the project, “Dynastic Risk Management,” we have in a first paper analyzed how family members of different generations insure each other against adverse economic shocks. The results have so far been presented at conferences and in some workshops. We expect to release a working paper in 2023. In a second paper, we have undertaken analyses to study the importance of bequest motives for saving among the elderly.
In the third part of the project, “Aggregate implications of household heterogeneity,” we have worked to understand the distributional consequences of asset price changes that are associated with lower required returns. In one paper, we show that it can explain observed saving behavior. In another piece, we derive implications for welfare. We have also studied monetary policy transmission, focusing on household heterogeneity, debt, and demographic change. This has resulted in one publication by team member Martin Holm, while at least two more working papers are underway. Postdoc Karl Harmenberg has contributed to two theoretical articles accepted for publication, one on rigid wage contracts in macroeconomic models.
In the first part of the project, the PI and team members have made substantial progress in collecting and validating necessary data and organizing them in a format that facilitates research according to the project’s objectives. We are also well underway in first-pass analyses on several dimensions of the original research plan. As the project enters its second phase, efforts will shift toward “bringing the macro models and data together.” We hope this will produce novel insights to improve our understanding of the dynamics of inequality and its macroeconomic implications.
Some results on the transmission of monetary policy have already been published (in the JPE), and several papers are underway towards submission.
Papers are also underway to understand empirical evidence on household saving behavior through the lens of state-of-the-art economic models (one article is under revision for ReStud, and a manuscript for a second article is in preparation).
On the same objective of advancing state-of-the-art macroeconomic modeling, Postdoc Karl Harmenberg has had his work on rigid wage contracts in macro models accepted for publication at the AER: Insights. He has also contributed to work on how to quantify the benefits of vaccines as an epidemic-management tool, part of which is now published in Journal of Economic Dynamics and Control.
Going forward, we expect new findings and insights under all the work packages described above, as the analyses underlying these articles are further developed and working papers finalized for submission to academic journals.
Some results on the transmission of monetary policy have already been published (in the JPE), and several papers are underway towards submission.
Papers are also underway to understand empirical evidence on household saving behavior through the lens of state-of-the-art economic models (one article is under revision for ReStud, and a manuscript for a second article is in preparation).
On the same objective of advancing state-of-the-art macroeconomic modeling, Postdoc Karl Harmenberg has had his work on rigid wage contracts in macro models accepted for publication at the AER: Insights. He has also contributed to work on how to quantify the benefits of vaccines as an epidemic-management tool, part of which is now published in Journal of Economic Dynamics and Control.
Going forward, we expect new findings and insights under all the work packages described above, as the analyses underlying these articles are further developed and working papers finalized for submission to academic journals.